Digital Shift And Interchange Fee Cap Will Pressure Margins And Future Earnings

Catalysts

About Banco Santander-Chile

Banco Santander-Chile is a leading Chilean bank focused on retail, SME and corporate banking, with an emphasis on digital services and fee-based products.

What are the underlying business or industry changes driving this perspective?

• The rapid pivot to a highly digital operating model and cloud-based core systems after Project Gravity could expose the bank to heightened cyber, operational and vendor concentration risks. Any disruption or regulatory incident would erode client trust, force higher compliance and technology spend, and compress net margins.
• The expected implementation of the second interchange fee cap, together with rising payment ecosystem competition, threatens the sustainability of high card and acquiring fee growth. This would pressure fee income expansion and limit future revenue diversification away from net interest income.
• Loan growth ambitions tied to a more favorable political and macro backdrop leave earnings vulnerable if large corporate investment and SME expansion fail to materialize at the projected pace. This would cap balance sheet growth and constrain revenue and earnings momentum.
• Persistently elevated cost of credit versus historical levels, combined with only gradual improvements in asset quality, suggests that any negative macro or credit cycle shock would quickly feed through to higher provisioning needs. This would weigh on net income and ROE from current peak levels.
• Reliance on maintaining a 4 percent net interest margin in an environment of moderating inflation and potentially lower policy rates risks margin compression if funding costs or competitive pricing intensify. This would limit the bank’s ability to sustain current ROE and earnings growth targets.

Assumptions

This narrative explores a more pessimistic perspective on Banco Santander-Chile compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Banco Santander-Chile's revenue will grow by 13.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 45.9% today to 32.7% in 3 years time.
• The bearish analysts expect earnings to reach CLP 1115.0 billion (and earnings per share of CLP 5.91) by about December 2028, up from CLP 1074.4 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as CLP1348.9 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.3x on those 2028 earnings, down from 12.0x today. This future PE is lower than the current PE for the US Banks industry at 12.1x.
• The bearish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.42%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Chile's macro backdrop is improving, with GDP expected to grow around 2.4 percent this year and close to 2 percent next year. Election outcomes are likely to be market friendly and supportive of investment, which could underpin steady loan demand and support revenue and earnings rather than a sustained decline.
• The bank's digital transformation and cloud migration under Project Gravity are already translating into a best-in-class efficiency ratio in the mid 30s, a recurrence ratio above 60 percent, and lower cost per active client. This structurally supports high profitability and cushions net margins and earnings against cyclical slowdowns.
• Fee and transaction income are becoming a larger share of revenues, with fee generation rising from 15 percent to 20 percent of income, card and payments volumes growing at double-digit rates, and mutual fund volumes up 15 percent. This creates diversified, recurring revenue streams that reduce dependence on net interest income and support total revenue resilience.
• Strong asset quality trends and capital buffers, including improving NPL ratios, a guided decline in cost of risk toward 1.3 percent, and a CET1 ratio of 10.8 percent well above regulatory minimums, provide room to absorb shocks while still delivering ROE guidance of 22 percent to 24 percent, limiting downside risk to earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Banco Santander-Chile is CLP47.09, which represents up to two standard deviations below the consensus price target of CLP66.16. This valuation is based on what can be assumed as the expectations of Banco Santander-Chile's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CLP74.0, and the most bearish reporting a price target of just CLP44.1.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be CLP3408.5 billion, earnings will come to CLP1115.0 billion, and it would be trading on a PE ratio of 11.3x, assuming you use a discount rate of 12.4%.
  
• Given the current share price of CLP68.7, the analyst price target of CLP47.09 is 45.9% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.